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Constellation stock surging


Constellation Energy Group Inc.'s stock price has risen more than 30 percent since the beginning of August, hitting an all-time high of $44 on Tuesday, in response to analysts' projections that the company's merchant energy business will grow as a result of electric utility deregulation.

A number of factors have played a role in the strong performance of Constellation - parent of Baltimore Gas and Electric Co. - including company efforts to build power plants, avoid risky mergers and transform itself into a diversified energy retailer.

Daniel L. Tulis, an analyst with Banc of America Securities LLC, said in a report that he expects Constellation's stock to hit $65 a share in the next 12 months.

Yesterday, Constellation's shares gained 42.19 cents to close at $43.6875 on the New York Stock Exchange.

"The company recognizes that building a premier energy marketing and trading operation is not as simple as hiring a few traders," Tulis' report states. "The company's strategy is driven by its marketing arm and is enhanced by its growing power portfolio.

"In response to deregulating energy markets, CEG is re-creating itself as an integrated merchant energy company from its beginnings as a natural gas and power utility. We believe this transformation will lead to an acceleration of earnings growth and potential for valuation expansion."

Tulis estimates that the wholesale power industry will grow by at least 40 percent to 50 percent during the next five years.

Duke Energy, located in Charlotte, N.C., and El Paso Energy Corp. and Reliant Energy, both in Houston, are among a few companies nationwide that also are performing well.

Since last year, Constellation's stock price has increased by 47 percent.

"What we have tried to do is get ourselves ready to operate in a very different electric power industry that is changing every day," said Kevin J. Miller, Constellation's financial planning manager. "We came up with a two-pronged strategy - which was, No. 1, to remain the premier energy supplier in Maryland; BGE does that for us. And two, expand in the power-production area into surrounding regions. Over the next four years, we're committing $3 billion into construction of new power plants.

"It's an exciting growth opportunity for us."

Lending a hand to Constellation's growth is the strengthened market.

"The whole industry is doing well," said Ronald S. Tanner, an analyst with Legg Mason Wood Walker in Baltimore. "It's one of the best-performing sectors here to date; it was probably the worst last year. It's a complete turnaround.

"It helps that interest rates have declined. This is a defensive industry, so when interest rates go down, stocks go up."

It also helps that Orion Power Holdings Inc., a joint venture between the New York investment firm Goldman Sachs Group Inc. and a Constellation affiliate, filed with the Securities Exchange Commission last month to sell shares to the public. The transaction might add as much as $5 to Constellation's share price, according to the Tulis report.

Orion Power is a Baltimore-based company that buys and operates power plants nationwide.

Analysts also say Maryland's newly created deregulated market for electricity has helped boost Constellation's stock prices.

With the expectation of deregulation, which started in the Baltimore area Aug. 5, BGE transferred about 6,200 megawatts of generation capacity to Constellation's nonregulated merchant subsidiary, Constellation Power Source, the Tulis report states. BGE is also ideally located in the region composed of Pennsylvania, New Jersey, Maryland, Delaware and the District of Columbia - which is one of the most liquid wholesale power markets in the United States and is near several major power-consuming regions, including New York, New England and the Midwest.

The new structure will allow Constellation to sell power on the wholesale market to customers and regions that offer the highest margin potential. It also will allow Constellation to stop running plants if it is more economical to buy power from other suppliers, according to Tulis.

Tanner said avoiding investment mistakes overseas also contributed to the company's well-being. Instead, Constellation has targeted Wisconsin, Illinois, Michigan, Indiana, Kentucky, Ohio, West Virginia, Florida and Texas for likely expansion.

In addition, Tanner says that Constellation has "gotten pretty good regulatory treatment. Companies that have kept their generation systems tend to do better because of the shortages of power across the country."

Deregulation allowed BGE to reduce overall electric rates for residential customers by 6.5 percent, a fixed rate for six years that could make it difficult for other competitors to enter the market in the Baltimore region. As a result, analysts believe that BGE will lose few residential customers.

However, Tulis warns of potential risks that could affect Constellation's stock, such as the outcome of an appeal of the Baltimore region's deregulation plan by the Mid-Atlantic Power Supply Association, a group of competitive retail power suppliers. A ruling on the civil case is expected at the end of the month.

Another factor that could hurt the company is that Constellation, unlike its merchant peers, has its roots in the regulated natural gas and electric utility business, and is not involved in wholesale natural gas marketing and trading. The company "was not born from a purely entrepreneurial framework," which could cause investors to take longer to recognize the value in Constellation's shares.

With deregulation rules changing on a state-by-state basis, Miller said, Constellation "must be nimble, now and in the future, to adjust and modify our plans to overcome any roadblocks we encounter along the way."

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